Weekly Wrap

This will be a shorter than usual post since I will be away most of the weekend for my birthday celebrations.

Market commentary

What a surprise! As I wryly forecast last week, Greece has indeed secured its bail-out with a four month extension to loans to keep the euros flowing (and piling on debt with even more debt).

So the extend and pretend cycle is alive and well – the default position of the politicos. The break-up of the euro wasn’t even a glimmer of a possibility – the EU would do anything to keep Greece onside and the doomed euro project alive.

The media is portraying this as a Greek capitulation, but I do not see it that way. Neither side’s immediate interests were going to be served by not extending the loans. But the brief four month period – not six, as Greece initially wanted – will certainly concentrate minds. And give the markets time to focus on the next Greek drama – a certain four months away!

That will be precisely the time I had in mind for the euro to rally to wipe out the extreme bearishness built up over the past few months. How convenient!

The next Greek crisis will be in June (or before)

But the next crisis meetings – four months away – will not be so kind to the markets, I fear. Greece’s debt-to-GDP will be even higher in the stratosphere, and there will be no letup on the ground regarding austerity – and the natives are certain to become restless again. This summer promises to be a long, hot one in the birthplace of democracy.

It will not be the bankers and the rich that will continue to shoulder the burden of austerity, but the ‘little people’. Unemployment rates remain high – and will get higher as the size of the Greek state must shrink. Headcount must drop – and where will those laid off get a job with the same uber-generous benefits they enjoyed as state employees?

Naturally, stocks zoomed into new highs with the FTSE finally overcoming its multi-year resistance at 6,900 to close at 6,950. Whether it can maintain the gains is another matter. I shall be watching for signs of weakness – and the waves.

There is no doubt that US stock valuations are very high, but as we found in the dotcom mania period, silly valuations can get sillier – and even sillier. This is no time to fight the bull trend – yet.

I am tracking the Elliott waves in the S&P and we are either in a third wave up or in the final fifth wave – it is too soon to tell just yet.

But my consolation is that US Treasuries are declining as stocks are rising and I am short.

One straw in the wind: latest AAII weekly survey of mom and pop US retail investors show them at their most bullish in a long time: Bullish (up 7%) at 47%. Bearish (down 2%) at 18%.

Also, their asset allocation shows record high share ownership vs record low bonds ownership. The public have fallen in love with equities – a necessary condition for a major top.

The euro will gather strength into Spring

I have been getting more bullish on the euro and with yesterday’s big reversal, the 1.11 low of late January looks more and more secure as a long-term low.

I am looking for a challenge to the pink zone and if it can break above, the relief rally to the 1.20 area will be my first target.

But a move to a new low below 1.11 will be the final fifth wave down and that will be the opportunity to position long – especially if there is one of my trademark momentum divergences.

Gold at crossroads at $1200

My thesis that gold would rally short-term is being severely tested: